Can You Believe These 2 ETFs?

ETFs have evolved in impressive ways since they came to the market, says
Doug Fabian, who explains two ETF vehicles
that would have been unthinkable a few years ago.

Innovation in the world of exchange traded funds. Doug Fabian is here
and Doug, innovation, how could that be?

Well, Ray, I'll tell you. When I first invested in an ETF, the year was 1997,
I bought SPY, which is just the S&P 500, and there were four or five ETFs on
the marketplace. Today, there are over 1,200 exchange traded funds, getting
investors access to all kinds of investment opportunities around the world. So
the ETF industry has evolved tremendously in the past ten years.

Let me give you a couple of examples. One exchange traded fund is a play just
on shorting stocks. It's almost like owning a small hedge fund. The ticker
symbol is AdvisorShares Active Bear ETF (HDGE).
Hedge is the idea, and it's an actively managed ETF.

Most people think of ETFs as indexes-The S&P 500 or the Dow Jones
Industrial Average or small-cap stocks, but here is a new innovation where you
have the liquidity and the transparency that we all love about exchange traded
funds, and low expenses, and now you can now hedge off stock market risk with
that particular product.

Another innovative ETF strategy...is the VEQTOR Exchange Traded
Note (VQT).
This ETF uses the S&P 500, kind of invests like SPY, but it hedges off of
risk. It has an automatic stop-loss of 2%. So if the market falls 2%, it goes to
cash, and then it buys volatility.

So last August 2011, when the market fell 18% in three weeks, this portfolio
went from 97% long in stocks, switched to cash, then went essentially short the
market because it bought volatility. And it went up 8% when the market fell 18%,
and then when the volatility settled down, it just started going up again like
the S&P 500.

It's quite an innovative investment strategy that they're employing that
allows an investor to own something where they don't have to worry about the
bottom falling off any one day. That's another innovative way that ETFs are
being used.

You have a recurring theme here: volatility can be used as an
advantage.

Absolutely, absolutely. And I believe volatility is kind of here to stay. So
investors need to be looking for solutions that allow them to sleep well at
night, and not deal with so much volatility in their portfolio, because they end
up getting scared out of the market at the worst possible time.